12/02/2010 @ 12:09PM

Nine Tips For Tax-Smart Charitable Giving

Around this time of year, there’s a lot of focus on giving. Even in tough times, Americans are inclined to reach into their pockets to help those in need. A recent Red Cross survey found that nearly 8 in 10 people make a donation of some sort at the holidays with more than half of survey respondents saying that making a gift helps get them into the holiday spirit.

Making a gift does more than put many in the holiday spirit: Making a donation to a qualified charitable organization allows taxpayers who itemize to reduce their taxable income for federal income tax purposes. Taxpayers who make charitable gifts may claim eligible gifts as itemized deductions on Schedule A of their federal form 1040.

Of course, as with anything tax related, there are rules. Here are some key guidelines for making and reporting charitable contributions:

1. Get good documentation.

Cash, or cash equivalents like checks and credit cards, are the easiest kind of gifts to make, but they can also be the easiest to forget about. Since 2007 charitable deductions paid in cash or cash equivalent must be substantiated by a bank record, such as a canceled check or credit card receipts, or by a written receipt from the organization, regardless of the amount of the gift. The bank record or receipt should include the date, the amount and the name and address of the organization that received the donation. If the amount of the gift tops $250, you’ll want to have both: bank records and a receipt.

2. Know the value of your stuff.

The rule is that you can generally take a deduction for the fair market value of non-cash items such as used clothing or furniture equal to the amount that the item would sell for in its current condition. However, non-cash items must be in “good” condition or better, or the contribution is completely disallowed. There is an exception to the rule: If the item is valued over $500 but not in “good” condition, you may still take the deduction if you have an appraisal for the item. Special rules apply to hard to value items such as artwork and collectibles; you’ll always want to get appraisals for those items.

3. Give appreciated assets.

Making gifts of property that has appreciated in value, like stocks, can give taxpayers a double benefit. For appreciated property, you will generally receive a deduction for the fair market value of the gift if you’ve owned the property for at least a year. Even better, you’re not taxed on the gain on the property. With that in mind, consider making in kind donations of appreciated stocks and other assets–rather than selling the items and then donating the proceeds–in order to avoid paying capital gains tax.

For more advice on giving appreciated and illiquid assets, click here.

4. Your time is priceless.

Not only is your time priceless, it’s also worthless for purposes of charitable deductions. The donation of personal services is never deductible as a charitable donation even if you can easily value your services. However, out-of-pocket expenses relating to volunteering your services for charitable organizations are deductible. Deductible costs would include the cost of transportation, such as driving (the standard mileage rate for 2010 is 14 cents a mile for charitable purposes), parking fees and tolls. You can also claim travel expenses such as air, rail, and bus transportation, taxi fares or other costs of transportation between the airport or station and your hotel, the cost of lodging and the cost of meals if you incur those costs while you are away from home and performing services for charity.

5. Beware of quid pro quo.

Charitable donations are supposed to be about the giving and not so much about the getting. That doesn’t mean, however, that you can’t get something in return when you make a gift; it does, however, limit your deduction. A charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. So what happens when you donate to your local college and get a coffee mug in return? You can deduct the cost of your donation less the value of the mug. If you’re not sure of the value of an item or service received after a donation, just ask. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter or receipt.

6. Timing is everything.

Your donation is deductible in the year you make the charitable gift. If you deliver the gift directly to the organization, it’s deductible as of the date you drop it off. If you make a gift by check, the date that matters is the day that you put the check in the mail, not when the check actually clears. And if you pay by credit card, the donation is valid as of the day the charge is made, not when you actually pay the card. So watch those year- end gifts carefully to make sure that your gifts are in order by Dec. 31 in order to qualify as a deduction for the current tax year.

Charitable donations are only deductible for federal income tax purposes if they’re made to qualified charitable organizations. Generally, this means organizations recognized by the IRS as public charities under section 501(c)(3) of the Tax Code. Remember that contributions to individuals, no matter how deserving, don’t qualify for charitable deductions; contributions to foreign governments, foreign charities, and certain private foundations are also not deductible. If you’re not sure whether an organization qualifies, ask to see their exemption letter from the IRS. You can also search the IRS database online here.

For the majority of taxpayers, limits on charitable deductions won’t affect your bottom line. However, if you’re so generous as to donate more than 20% of your adjusted gross income, you’ll want to be cautious of annual deduction limits; if you exceed your allowable charitable deductions for the tax year, you may be able to carry the excess over to the following tax year.

9. Read the fine print.

Tax rules are always changing and it’s important to keep up in order to take maximum advantage of special tax breaks–or limitations–that might affect you. For example, taxpayers can opt to take donations made in early 2010 to qualifying organizations providing earthquake relief in Haiti on their 2009 or 2010 tax returns, but not both. Similarly, in 2009, qualifying seniors could donate up to $100,000 from their individual retirement accounts (IRAs) directly to charity, tax-free; this provision has not been extended to 2010 yet, but might still be in Congress’ current lame-duck session. Things could get even trickier in the future as Congress seeks to close the deficit. For example, the chairs of President Obama’s deficit reduction commission have proposed sharply limiting the value of charitable deductions for the better off.

So watch for breaking tax news and always check with your tax professional when you have specific questions or concerns.